Exam Prep Ch13 Translation of Financial Statements of

Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Chapter Number: 13

Question Type: Multiple Choice

1) When translating foreign currency financial statements for a company whose functional currency is the U.S. dollar, which of the following accounts is translated using historical exchange rates?

a) Notes Payable, Yes; Equipment, Yes

b) Notes Payable, Yes; Equipment, No

c) Notes Payable, No; Equipment, No

d) Notes Payable, No; Equipment, Yes

Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy

Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars.

Section Reference: 13.4

2) Under the temporal method, monetary assets and liabilities are translated by using the exchange rate existing at the:

a) beginning of the current year.

b) date the transaction occurred.

c) balance sheet date.

d) None of these.

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Easy

Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars.

Section Reference: 13.4

3) The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called:

a) verification.

b) translation.

c) remeasurement.

d) None of these.

Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Easy

Learning Objective: 5 Distinguish between the circumstances under which each of the two methods is appropriate under current GAAP.

Section Reference: 13.6

4) Which of the following would be restated using the average exchange rate under the temporal method?

a) cost of goods sold

b) depreciation expense

c) amortization expense

d) None of these

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Medium

Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars.

Section Reference: 13.4

5) Paid-in capital accounts are translated using the historical exchange rate under:

a) the current rate method only.

b) the temporal method only.

c) both the current rate and temporal methods.

d) neither the current rate nor temporal methods.

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Medium

Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars.

Section Reference: 13.4

6) Which of the following would be restated using the current exchange rate under the temporal method?

a) Marketable securities carried at cost.

b) Inventory carried at market.

c) Common stock.

d) None of these.

Question Title: Test Bank (Multiple Choice) Question 06

Difficulty: Easy

Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars.

Section Reference: 13.4

7) The translation adjustment that results from translating the financial statements of a foreign subsidiary using the current rate method should be:

a) included as a separate item in the stockholders' equity section of the balance sheet.

b) included in the determination of net income for the period it occurs.

c) deferred and amortized over a period not to exceed forty years.

d) deferred until a subsequent year when a loss occurs and offset against that loss.

Question Title: Test Bank (Multiple Choice) Question 07

Difficulty: Medium

Learning Objective: 9 Understand the concept of comprehensive income in the context of foreign currency translation.

Section Reference: 13.7

8) Average exchange rates are used to translate certain items from foreign financial statements into U.S. dollars. Such averages are used in order to:

a) smooth out large translation gains and losses.

b) eliminate temporary fluctuation in exchange rates that may be reversed in the next fiscal period.

c) avoid using different exchange rates for some revenue and expense accounts.

d) approximate the exchange rate in effect when the items were recognized.

Question Title: Test Bank (Multiple Choice) Question 08

Difficulty: Easy

Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars.

Section Reference: 13.4

9) When the functional currency is identified as the U.S. dollar, land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated using the:

a) historical rate in effect when the land was purchased.

b) current rate in effect at the balance sheet date.

c) forward rate.

d) average exchange rate for the current period.

Question Title: Test Bank (Multiple Choice) Question 09

Difficulty: Easy

Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.

Section Reference: 13.7

10) The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the U.S. dollar is the:

a) current exchange rate.

b) average exchange rate for the current year.

c) historical exchange rate in effect when the plant asset was acquired or the date of acquisition, whichever is later.

d) forward rate.

Question Title: Test Bank (Multiple Choice) Question 10

Difficulty: Easy

Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.

Section Reference: 13.7

11) The following balance sheet accounts of a foreign subsidiary at December 31, 2017, have been translated into U.S. dollars as follows:

What total should be included in the translated balance sheet at December 31, 2017, for the above items? Assume the U.S. dollar is the functional currency.

a) $1,270,000

b) $1,288,000

c) $1,300,000

d) $1,354,000

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Hard

Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.

Section Reference: 13.7

12) A foreign subsidiary's functional currency is its local currency which has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating:

a) Wages expense, Yes; Sales to customers, Yes

b) Wages expense, Yes; Sales to customers, No

c) Wages expense, No; Sales to customers, No

d) Wages expense, No; Sales to customers, Yes

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Easy

Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local currency.

Section Reference: 13.7

13) A wholly owned subsidiary of a U.S. parent company has certain expense accounts for the year ended December 31, 2017, stated in local currency units (LCU) as follows:

The exchange rates at various dates are as follows:

Assume that the LCU is the subsidiary's functional currency and that the charges to the expense accounts occurred approximately evenly during the year. What total dollar amount should be included in the translated income statement to reflect these expenses?

a) $687,500

b) $625,000

c) $550,000

d) $500,000

Question Title: Test Bank (Multiple Choice) Question 13

Difficulty: Easy

Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local currency.

Section Reference: 13.7

14) If the functional currency is determined to be the U.S. dollar and its financial statements are prepared in the local currency, SFAS 52, requires which of the following procedures to be followed?

a) Translate the financial statements into U.S. dollars using the current rate method.

b) Remeasure the financial statements into U.S. dollars using the temporal method.

c) Translate the financial statements into U.S. dollars using the temporal method.

d) Remeasure the financial statements into U.S. dollars using the current rate method.

Question Title: Test Bank (Multiple Choice) Question 14

Difficulty: Easy

Learning Objective: 5 Distinguish between the circumstances under which each of the two methods is appropriate under current GAAP.

Section Reference: 13.6

15) P Company acquired 90% of the outstanding common stock of S Company which is a foreign company. The acquisition was accounted for using the purchase method. In preparing consolidated statements, the paid-in capital of S Company should be converted at the:

a) exchange rate effective when S Company was organized.

b) exchange rate effective on the date of purchase of the stock of S Company by P Company.

c) average exchange rate for the period S Company stock has been upheld by P Company.

d) current exchange rate.

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Medium

Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local currency., 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.

Section Reference: 13.7

16) In preparing consolidated financial statements of a U.S. parent company and a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:

a) of the country the parent is located.

b) of the country the subsidiary is located.

c) in which the subsidiary primarily generates and spends cash.

d) in which the subsidiary maintains its accounting records.

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Easy

Learning Objective: 3 Identify the functional currency of a foreign entity.

Section Reference: 13.5

17) Gains from remeasuring a foreign subsidiary’s financial statements from the local currency, which is NOT the functional currency, into the parent company’s currency should be reported as a(n):

a) other comprehensive income item.

b) extraordinary item (net of tax).

c) part of continuing operations.

d) deferred credit.

Question Title: Test Bank (Multiple Choice) Question 17

Difficulty: Medium

Learning Objective: 9 Understand the concept of comprehensive income in the context of foreign currency translation.

Section Reference: 13.7

18) Assuming no significant inflation, gains resulting from the process of translating a foreign entity’s financial statements from the functional currency to U.S. dollars should be included as a(n):

a) other comprehensive income item.

b) extraordinary item (net of tax).

c) part of continuing operations.

d) deferred credit.

Question Title: Test Bank (Multiple Choice) Question 18

Difficulty: Easy

Learning Objective: 9 Understand the concept of comprehensive income in the context of foreign currency translation.

Section Reference: 13.7

19) A foreign subsidiary’s functional currency is its local currency and inflation of over 100 percent has been experienced over a three-year period. For consolidation purposes, SFAS No. 52 requires the use of:

a) the current rate method only.

b) the temporal method only

c) both the current rate and temporal methods.

d) neither the current rate or the temporal method.

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Medium

Learning Objective: 6 Explain the factors involved in translating the statements of a foreign entity operating in a highly inflationary economy.

Section Reference: 13.6

20) The objective of remeasurement is to:

a) produce the same results as if the books were maintained in the currency of the foreign entity’s largest customer.

b) produce the same results as if the books were maintained solely in the local currency.

c) produce the same results as if the books were maintained solely in the functional currency.

d) None of these.

Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Easy

Learning Objective: 5 Distinguish between the circumstances under which each of the two methods is appropriate under current GAAP.

Section Reference: 13.6

Question Type: Essay

21) To accomplish the objectives of translation, two translation methods are used depending on the functional currency of the foreign entity. Describe the two translation methods.

Under the temporal method, monetary assets and liabilities are translated at the current exchange rate. Assets and liabilities carried at historical cost are translated at historical exchange rates while those carried at current values are translated at the current exchange rate. Revenues and expenses except those related to assets and liabilities translated at historical rates, are translated at exchange rates in effect on the dates the underlying transaction occurred.

Question Title: Test Bank (Essay) Question 21

Difficulty: Medium

Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars.

Section Reference:

22) The translation process can be done using either the current rate method or the temporal method. Explain under what circumstances each of the methods is appropriate.

Question Title: Test Bank (Essay) Question 22

Difficulty: Hard

Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars., 5 Distinguish between the circumstances under which each of the two methods is appropriate under current GAAP., 6 Explain the factors involved in translating the statements of a foreign entity operating in a highly inflationary economy.

Section Reference: 13.4, 13.5, 13.6

23) Dakota, Inc. owns a company that operates in France. Account balances in francs for the subsidiary are shown below:

2017

January 1 December 31

Cash and Receivables 24,000 26,000

Supplies 1,000 500

Property, Plant, and Equipment 52,500 49,000

Accounts Payable (11,500) (5,500)

Long-term Notes Payable (19,000) (11,000)

Common Stock (30,000) (30,000)

Retained Earnings (17,000) (17,000)

Dividends-Declared & Paid on Dec 31 ---- 3,000

Revenues ---- (30,000)

Operating Expenses ---- 15,000

Totals -0- -0-

Exchange rates for 2017 were as follows:

January 1 $0.22

Average for the year 0.19

December 31 0.18

Revenues were earned and operating expenses, except for depreciation and supplies used, were incurred evenly throughout the year. No purchases of supplies or plant assets were made during the year.

Required:

A. Prepare a schedule to compute the translation adjustment for the year, assuming the subsidiary's functional currency is the franc.

B. Prepare a schedule to compute the translation gain or loss, assuming the subsidiary's functional currency is the U.S. dollar.

A. Translation

Francs Rate $

Exposed net asset position – 1/1 47,000 0.22 10,340

Adjustment for changes in net

asset position during the year

Add: Revenues 30,000 0.19 5,700

Less: Operating expenses (15,000) 0.19 (2,850)

Dividends (3,000) 0.18 (540)

Net asset position translated using ------- ------

rate in effect at date of transactions 12,650

Exposed net asset position – 12/31 59,000 0.18 10,620

Translation adjustment – loss 2,030

B. Translation

Francs Rate $

Exposed net monetary liability position – 1/1 (6,500) 0.22 (1,430)

Adjustments for changes in net

monetary position during the year

Add: increase in cash and

receivables – revenues 30,000 0.19 5,700

Less: decrease in monetary assets

or increase in monetary liabilities

Operating expenses (11,000) 0.19 (2,090)

Dividends paid (3,000) 0.18 (540)

Net monetary asset position

translated using rate in effect

at date of transactions 1,640

Exposed net monetary asset position – 12/31 9,500 0.18 1,710

Translation loss 70

Question Title: Test Bank (Problem) Question 13-1

Difficulty: Medium

Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local currency., 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.

Section Reference: 13.6, 13.7

24) Stiff Sails Corporation, a U.S. company, operates a 100%-owned British subsidiary, SeaBeWe Corporation. The U.S. dollar is the functional currency of the subsidiary. Financial statements for the subsidiary for the fiscal year-end December 31, 2017, are as follows:

SeaBeWe Corporation

Income Statement

Pounds

Sales 650,000

Cost of Goods Sold

Beginning Inventory 310,000

Purchases 265,000

Goods Available For Sale 575,000

Less: Ending Inventory 285,000

Cost of Goods Sold 290,000

Depreciation 79,000

Selling and Admin. Expenses 155,000

Income Taxes 32,000 556,000

Net Income 94,000

SeaBeWe Corporation

Partial Balance Sheet

Current Assets Current Liabilities

Cash 155,000 Notes Payable 78,000

Accts. Rec. 171,000 Accts. Payable 165,000

Inventories 285,000 Other Current Liab. 51,000

611,000 294,000

Long-term Liab. 250,000

(issued July 1, 2015)

Other Information:

1. Equipment costing 340,000 pounds was acquired July 1, 2015, and 38,000 was acquired June 30, 2017. Depreciation for the period was as follows:

Equipment – 2015 acquisitions 66,000

– 2017 acquisitions 6,000

2. The beginning inventory was acquired when the exchange rate was $1.77. The inventory is valued on a FIFO basis. Purchases and the ending inventory were acquired evenly throughout the period.

3. Dividends were paid by the subsidiary on June 30 amounting to 156,000 pounds.

4. Sales were made and all expenses were incurred uniformly throughout the year.

5. Exchange rates for the pound on various dates were:

July 1, 2015 $1.79

Jan. 1, 2017 1.75

June 30, 2017 1.74

Dec. 31, 2017 1.71

Average for 2017 1.73

Required:

A. Prepare a schedule to determine the translation gain or loss for 2016, assuming the net monetary liability position on January 1, 2017, was 180,000 pounds.

B. Compute the dollar amount that each of the following would be reported at in the 2017 financial statements:

1. Cost of Goods Sold.

2. Depreciation Expense.

3. Equipment.

A.

Beginning Net Monetary Liab. Pos. (180,000) × $1.75 = $(315,000)

+Sales 650,000 × 1.73 = 1,124,500

- Purchases (265,000) × 1.73 = (458,450)

- Selling & Admin. Expenses (155,000) × 1.73 = (268,150)

- Income Taxes (32,000) × 1.73 = (55,360)

- Equipment Purchased (38,000) × 1.74 = (66,120)

- Dividends Paid (156,000) × 1.74 = (271,440)

Net Monetary Liab. Pos. Trans. $(310,020)

- Ending Net Monetary Liab. Pos. (176,000) × 1.71 = (300,960)

Translation Gain $ 9,060

B.

1. Beginning Inventory 310,000 × $1.77 = $548,700

Purchases 265,000 × 1.73 = 458,450

Goods Available 575,000 1,007,150

Ending Inventory 285,000 × 1.73 = 493,050

Cost of Goods Sold 290,000 $514,100

2. Depr. on 2015 equipment: 66,000 × $1.79 = $118,140

Depr. on 2017 equipment: 6,000 × 1.74 = 10,440

2017 Depreciation Expense $128,580

3. 2015 equipment: 340,000 × $1.79 = $608,600

2017 equipment: 38,000 × 1.74 = 66,120

$674,720

Question Title: Test Bank (Problem) Question 13-2

Difficulty: Hard

Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.

Section Reference: 13.7

25) Accounts are listed below for a foreign subsidiary that maintains its books in its local currency. The equity interest in the subsidiary was acquired in a purchase transaction. In the space provided, indicate the exchange rate that would be used to translate the accounts into dollars assuming the functional currency was identified (a) as the U.S. dollar and (b) as the foreign entity's local currency. Use the following letters to identify the exchange rate:

H – Historical exchange rate

C – Current exchange rate

A – Average exchange rate for the current period

Exchange rate if the

functional currency is:

Account U.S. Dollar Local currency

1. Bonds Payable (issued 01/01/11) ___________ ______________
2. Office Supplies ___________ ______________
3. Dividends Declared ___________ ______________
4. Common Stock ___________ ______________
5. Additional Paid-In Capital ___________ ______________
6. Inventory Carried at Cost ___________ ______________
7. Short-term Notes Payable ___________ ______________
8. Accumulated Depreciation ___________ ______________
9. Cash ___________ ______________
10. Marketable Securities (carried

at market) ___________ ______________

1. Cost of Goods Sold ___________ ______________
2. Sales ___________ ______________
3. Accounts Receivable ___________ ______________
4. Depreciation Expense ___________ ______________
5. Income Tax Expense ___________ ______________

U.S. Local

Dollar Currency

1. C C

2. H C

3. H H

4. H H

5. H H

6. H C

7. C C

8. H C

9. C C

10. C C

11. H A

12. A A

13. C C

14. H A

15. A A

Question Title: Test Bank (Problem) Question 13-3

Difficulty: Easy

Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local currency., 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.

Section Reference: 13.7

26) Use the information below to (a) translate the year-end financial statements of Perfect Company, the foreign subsidiary, using the temporal method, and (b) prepare a schedule to compute the translation gain or loss for Perfect Company. Round numbers to the nearest dollar.

On January 2, 2017, Design Inc., a U.S. parent company, purchased a 100% interest in Perfect Company, a subdivision located in Switzerland. The purchase method of accounting was used to account for the acquisition. The 2017 financial statements for Perfect Company, the subsidiary, in Swiss francs were as follows:

Comparative Balance Sheets

Jan. 2 Dec. 31

Cash 15,000 33,000

Accounts receivable 45,000 49,500

Plant and equipment (net) (purchased 6/30/11) 75,000 67,500

Land (purchased 6/30/11) 45,000 45,000

Total 180,000 195,000

Accounts payable 13,500 18,000

Long-term notes payable (issued 6/30/11) 31,500 27,000

Common stock (issued 6/30/11) 90,000 90,000

Retained earnings 45,000 60,000

Total 180,000 195,000

Income Statement

Revenues 180,000

Operating expenses including depreciation

of 7,500 francs 135,000

Net income 45,000

Beginning retained earnings 45,000

90,000

Dividends declared and paid 30,000

Ending retained earnings 60,000

Sales were earned and operating expenses were incurred evenly during the year.

Exchange rates for the franc at various dates are:

January 2, 2017 0.8600

December 31, 2017 0.8830

Average for 2017 0.8715

December 10, 2017, dividend payment date 0.8810

June 30, 2014 0.8316

Temporal method

Translation U.S.

Francs Rate $

Balance Sheet

Cash 33,000 0.8830 29,139

Accounts Receivable 49,500 0.8830 43,709

Plant and Equipment (net) 67,500 0.8600 58,050

Land 45,000 0.8600 38,700

Total 195,000 169,598

Accounts Payable 18,000 0.8830 15,894

Notes Payable 27,000 0.8830 23,841

Common Stock 90,000 0.8600 77,400

Retained Earnings 60,000 Bal. Amt. 52,463

Total 195,000 169,598

Income Statement

Revenues 180,000 0.8715 156,870

Operating Expenses (127,500) 0.8715 (111,116)

Depreciation Expense (7,500) 0.8600 (6,450)

Translation Gain (loss) 889

Net Income 45,000 40,193

Retained Earnings – 1/1 45,000 0.8600 38,700

90,000 78,893

Dividends Declared (30,000) 0.8810 (26,430)

Retained Earnings – 12/31 60,000 52,463

Translation U.S.

Francs Rate $

Exposed net monetary asset position –

1/1 (60,000 - 45,000) 15,000 0.8600 12,900

Add: Increases in net monetary assets –

Revenues 180,000 0.8715 156,870

Less: Decreases in net monetary assets –

Operating expenses (127,500) 0.8715 (111,116)

Dividends (30,000) 0.8810 (26,430)

Net monetary position translated using

the rate in effect at date of transaction 32,224

Exposed net monetary asset position –

12/31 37,500 0.8830 33,113

Translation gain (loss) 889

Question Title: Test Bank (Problem) Question 13-4

Difficulty: Hard

Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.

Section Reference: 13.7

27) Pike Corporation, a U.S. Company, formed a subsidiary with a new company in London on January 1, 2017, by investing 500,000 British pounds in exchange for all of the subsidiary’s common stock. The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1, 2017. The building is being depreciated over a 40-year life by the straight-line method. The inventory is valued on an average cost basis. The British pound is the subsidiary’s functional currency and its reporting currency and has not experienced any abnormal inflation. Exchange rates for the pound on various dates were:

January 1, 2017 1 pound = 1.81

July 1, 2017 1 pound = 1.86

December 31, 2017 1 pound = 1.83

2017 average rate 1 pound = 1.82

The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2017.

Debits In Pounds

Cash 200,000

Accounts receivable 60,000

Inventory 80,000

Land 100,000

Building 300,000

Depreciation expense 3,750

Cost of goods sold 213,750

Other expenses 90,000

Total debits 1,047,500

Credits

Accumulated depreciation 3,750

Accounts payable 84,000

Accrued liabilities 16,750

Common stock 500,000

Retained earnings - 0 -

Sales revenue 443,000

Total credits 1,047,500

Required: Using the current rate method prepare the subsidiary’s:

A. Translated workpapers (round to the nearest dollar)

B. Translated income statement

C. Translated balance sheet

A.

Subsidiary Corporation

Translated Workpapers

Debits

Cash 200,000 × 1.83 = $366,000

Accounts receivable 60,000 × 1.83 = 109,800

Inventory 80,000 × 1.83 = 146,400

Land 100,000 × 1.83 = 183,000

Building 300,000 × 1.83 = 549,000

Depreciation expense 3,750 × 1.82 = 6,825

Cost of goods sold 213,750 × 1.82 = 389,025

Other expenses 90,000 × 1.82 = 163,800

Total debits $1,913,850

Credits

Accumulated depreciation 3,750 × 1.83 = $ 6,863

Accounts payable 84,000 × 1.83 = 153,720

Accrued liabilities 16,750 × 1.83 = 30,653

Common stock 500,000 × 1.81 = 905,000

Retained earnings - 0 -

Sales revenue 443,000 × 1.82 = 806,260

Total credits 1,902,496

Cumulative Translation Adjustment-Credit balance 11,354

$1,913,850

B.

Subsidiary Corporation

Translated Income Statement

For the Year Ended December 31, 2017

Sales revenue $806,260

Expenses:

Cost of goods sold (389,025)

Depreciation expense (6,825)

Other expenses (163,800)

Net income $246,610

Beginning retained earnings, Jan. 1, 2017 - 0 -

Ending retained earnings, Dec. 31, 2017 $ 246,610

C.

Subsidiary Corporation

Translated Balance Sheet

December 31, 2017

Assets:

Cash $366,000

Accounts receivable 109,800

Inventory 146,400

Land 183,000

Building-net 542,137

Total Assets $1,347,337

Equities:

Accounts payable $153,720

Accrued liabilities 30,653

Common stock 905,000

Retained earnings 246,610

Other comprehensive income-translation adj. 11,354

Total liabilities and equity $1,347,337

Question Title: Test Bank (Problem) Question 13-5

Difficulty: Hard

Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.

Section Reference: 13.7

28) Pike Corporation, a U.S. Company, formed a subsidiary with a new company in London on January 1, 2017, by investing 500,000 British pounds in exchange for all of the subsidiary’s common stock. The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1, 2017. The building is being depreciated over a 40-year life by the straight-line method. The inventory is valued on an average cost basis. The British pound is the subsidiary’s functional currency and its reporting currency and has not experienced any abnormal inflation. Exchange rates for the pound on various dates were:

January 1, 2017 1 pound = 1.81

July 1, 2017 1 pound = 1.86

December 31, 2017 1 pound = 1.83

2017 average rate 1 pound = 1.82

The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2017.

Debits In Pounds

Cash 200,000

Accounts receivable 60,000

Inventory 80,000

Land 100,000

Building 300,000

Depreciation expense 3,750

Cost of goods sold 213,750

Other expenses 90,000

Total debits 1,047,500

Credits

Accumulated depreciation 3,750

Accounts payable 84,000

Accrued liabilities 16,750

Common stock 500,000

Retained earnings - 0 -

Sales revenue 443,000

Total credits 1,047,500

Required: Using the temporal method prepare the subsidiary’s:

A. Translated workpapers (round to the nearest dollar)

B. Translated income statement

C. Translated balance sheet

A.

Subsidiary Corporation

Translated Workpapers

Debits

Cash 200,000 × 1.83 = $366,000

Accounts receivable 60,000 × 1.83 = 109,800

Inventory (average cost method) 80,000 × 1.82 = 145,600

Land 100,000 × 1.86 = 186,000

Building 300,000 × 1.86 = 558,000

Depreciation expense 3,750 × 1.86 = 6,975

Cost of goods sold 213,750 × 1.82 = 389,025

Other expenses 90,000 × 1.82 = 163,800

Total debits $1,925,200

Credits

Accumulated depreciation 3,750 × 1.86 = $ 6,975

Accounts payable 84,000 × 1.83 = 153,720

Accrued liabilities 16,750 × 1.83 = 30,653

Common stock 500,000 × 1.81 = 905,000

Retained earnings - 0 -

Sales revenue 443,000 × 1.82 = 806,260

Total credits $1,902,608

Cumulative translation

remeasurement gain-credit balance 22,592

$1,925,200

B.

Subsidiary Corporation

Translated Income Statement

For the Year Ended December 31, 2017

Sales revenue $806,260

Expenses:

Cost of goods sold (389,025)

Depreciation expense (6,975)

Other expenses (163,800)

Translation remeasurement gain 22,592

Net income 269,052

Beginning retained earnings, Jan. 1, 2017 - 0 - .

Ending retained earnings, Dec. 31, 2017 $ 269,052

C.

Subsidiary Corporation

Translated Balance Sheet

December 31, 2017

Assets:

Cash $366,000

Accounts receivable 109,800

Inventory 145,600

Land 186,000

Building-net 551,025

Total Assets $1,358,425

Equities:

Accounts payable 153,720

Accrued liabilities 30,653

Common stock 905,000

Retained earnings 269,052

Total liabilities and equity $1,358,425

Question Title: Test Bank (Problem) Question 13-6

Difficulty: Hard

Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.

Section Reference: 13.7

29) On January 1, 2017, Roswell Systems, a U.S.-based company, purchased a controlling interest in Bern Management Consultants located in Bern, Switzerland. The acquisition was treated as a purchase transaction. The 2017 financial statements stated in Swiss francs are given below.

BERN MANAGEMENT CONSULTANTS

Comparative Balance Sheets

January 1 and December 31, 2017

Jan. 1 Dec. 31

Cash and Receivables 30,000 84,000

Net Property, Plant, and Equipment 60,000 56,000

Totals 90,000 140,000

Accounts and Notes Payable 45,000 50,000

Common Stock 30,000 30,000

Retained Earnings 15,000 60,000

Totals 90,000 140,000

BERN MANAGEMENT CONSULTANTS

Consolidated Income and Retained Earnings Statement

For the Year Ended December 31, 2017

Revenues 112,000

Operating Expenses including depreciation of 5,000 francs 45,000

Net income 67,000

Dividends Declared and Paid 22,000

Increase in Retained Earnings 45,000

Direct exchange rates for Swiss franc are:

U.S. Dollars per Franc

January 1, 2017 $0.9987

December 31, 2017 0.9321

Average for 2017 0.9654

Dividend declaration and payment date 0.9810

Required:

A. Translate the year-end balance sheet and income statement of the foreign subsidiary using the current rate method of translation.

B. Prepare a schedule to verify the translation adjustment.

Part A Swiss Translation

Francs Rate $

Consolidated Income and Retained Earnings Statement

Revenues 112,000 $0.9654 108,125

Operating Expenses (45,000) 0.9654 43,443

Net Income 67,000 64,682

Retained Earnings – 1/1 15,000 0.9987 14,981

82,000 79,663

Dividends (22,000) 0.9810 (21,582)

Retained Earnings – 12/31 60,000 58,081

Balance Sheet

Cash and Receivables 84,000 0.9321 78,296

Net Property, Plant and Equipment 56,000 0.9321 52,198

Total 140,000 130,494

Accounts and Notes Payable 50,000 0.9321 46,605

Common Stock 30,000 0.9987 29,961

Retained Earnings 60,000 58,081

140,000 134,647

Cumulative Translation Adjustment (debit) --- Balancing amt. (4,153)

Total 140,000 130,494

Part B Swiss Translation

Francs Rate $

Exposed net asset position – 1/1 45,000 $0.9987 44,942

Adjustment for changes in the net asset position during the year:

Net income 67,000 0.9654 64,682

Dividends (22,000) 0.9810 (21,582)

Net asset position translated using rate in effect at date of

transactions ---- 88,042

Exposed net asset position – 12/31 90,000 0.9321 83,889

Cumulative translation adjustment (debit) 4,153

Question Title: Test Bank (Problem) Question 13-7

Difficulty: Hard

Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar., 10 Identify the disclosure requirements for firms with foreign entities.

Section Reference: 13.7, 13.8